1. RSI (Relative Strength Index)
What It Is:
- The RSI is a momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and helps identify overbought or oversold conditions.
How to Use:
- Overbought/Sold Levels:
- RSI above 70: The asset is considered overbought, which might indicate a price correction or pullback.
- RSI below 30: The asset is considered oversold, which might suggest a potential rebound or upward move.
- Divergences:
- Bullish Divergence: When the price makes lower lows but the RSI makes higher lows, signaling a possible upward reversal.
- Bearish Divergence: When the price makes higher highs but the RSI makes lower highs, indicating a potential downward reversal.
- Trend Identification:
- RSI can confirm trends. For example, in a strong uptrend, the RSI often stays above 50, and in a downtrend, it remains below 50.
2. MACD (Moving Average Convergence Divergence)
What It Is:
- MACD is a trend-following indicator that shows the relationship between two moving averages of an asset's price. The indicator consists of the MACD line (the difference between the 12-period EMA and the 26-period EMA), the signal line (9-period EMA of the MACD line), and the histogram (difference between the MACD line and the signal line).
How to Use:
- MACD Line and Signal Line Crossover:
- Bullish Crossover: When the MACD line crosses above the signal line, it suggests a potential buying opportunity.
- Bearish Crossover: When the MACD line crosses below the signal line, it indicates a potential selling signal.
- Histogram Analysis:
- The histogram can show the strength of the trend. Increasing histogram bars mean the trend is strengthening, while decreasing bars indicate a weakening trend.
- Zero Line Crossover:
- A MACD line crossing above the zero line suggests a bullish trend, while crossing below indicates a bearish trend.
3. Bollinger Bands
What It Is:
- Bollinger Bands consist of a middle band (typically a 20-day simple moving average) and two outer bands (usually 2 standard deviations away from the middle band). These bands expand and contract based on volatility.
How to Use:
- Overbought and Oversold Conditions:
- When the price touches or exceeds the upper Bollinger Band, the asset may be overbought, suggesting a possible reversal to the downside.
- When the price touches or goes below the lower Bollinger Band, the asset might be oversold, signaling a possible upward reversal.
- Bollinger Band Squeeze:
- When the bands contract and narrow, it indicates low volatility and often precedes a sharp move in either direction.
- A breakout from the squeeze, either upwards or downwards, can indicate the beginning of a new trend.
- Trend Following:
- Prices tend to stay within the bands. In an uptrend, prices may stay near the upper band, while in a downtrend, they may hover near the lower band.
Combining the Indicators
- RSI + MACD: A combination of RSI signaling overbought/oversold conditions with MACD showing trend changes can help confirm potential entry or exit points.
- RSI + Bollinger Bands: Using RSI to validate signals generated by Bollinger Bands (e.g., overbought when price hits the upper band) can refine strategies.
- MACD + Bollinger Bands: Use the Bollinger Bands for volatility analysis, and MACD for trend direction and momentum confirmation.
Each of these indicators complements different market conditions, and when combined, they can provide stronger confirmation of market trends or reversals.